NextEra Energy could use its robust clean energy pipeline to entice regulators to approve a potential acquisition of Duke Energy, according to at least one Wall Street analyst. Source: Florida Power & Light Co.

Wall Street analysts expressed skepticism and outright doubt regarding the potential merger of the nation's two largest, investor-owned utilities to create a "mega-utility" with a $200 billion market capitalization. As difficult as it may be, however, the prospect of such a transaction holds some merit.

Juno Beach, Fla.-headquartered NextEra Energy Inc. approached Charlotte, N.C.-headquartered Duke Energy Corp. about a potential takeover north of $60 billion, The Wall Street Journal reported Sept. 29, citing anonymous sources familiar with the matter. While rebuffed, NextEra was "testing the waters" and is still interested in pursuing a deal, according to the newspaper.

Duke Energy's stock jumped Sept. 30 before closing up more than 7% at $88.56, while NextEra shares closed down nearly 2% at $277.56 as the Journal itself questioned the validity of such a blockbuster deal in a separate article.

"There is no way this deal would work," Guggenheim Securities LLC analyst Shahriar Pourreza told S&P Global Market Intelligence. "They would face significant regulatory pushback, especially in North Carolina with a Florida utility coming in there."

Pourreza added that "market power concerns" would also arise in Florida, which does not have statutory authority over mergers and acquisitions but could solicit comments that may prompt the federal government to step in.

Duke Energy operates in Florida through its Duke Energy Florida LLC subsidiary, which has about 10,200 MW of electric generation capacity and serves 1.8 million customers.

NextEra serves about 5.5 million customer accounts in Florida through its principal subsidiary, Florida Power & Light Co., and recently acquired utility Gulf Power Co., with a combined 30,800 MW of power generating capacity. The utility's competitive arm adds another 22,500 MW of capacity.

Duke Energy, which operates in six states, serves about 7.8 million electric customers and 1.6 million natural gas customers. The company's electric power operations include about 51,000 MW of regulated generation capacity and about 2,300 MW of competitive renewable energy assets.

Scotia Capital (USA) Inc. analyst Andrew Weisel said the possibility of NextEra acquiring Duke Energy to create a "mega-utility" with a $200 billion market cap and $320 billion expected value "would be tough to pull off."

"First, regulatory approvals would be cumbersome, and [NextEra] doesn't have a good track record of acquiring distribution companies," Weisel wrote in a Sept. 30 research report. "Second, shareholder approval might not be a layup for [NextEra], as buying [Duke Energy] would weigh on its EPS/DPS growth rates, as well as its squeaky-clean ESG profile. Lastly, if [Duke Energy] rejected [NextEra's] offer, as WSJ reports, hostile takeovers are exceptionally rare in the world of U.S. regulated utilities."

"All that said, a consummated deal would be highly attractive in terms of EPS accretion for [NextEra] and a potential acceleration of carbon emission reductions for [Duke Energy's] subsidiaries," the analyst added.

Deal 'does have some merits'

CreditSights analyst Andrew DeVries said that "on the surface" the prospect of NextEra, with a market cap of about $139 billion, acquiring Duke Energy, with a market cap of $61 billion, "seems a little far-fetched" but the deal "does have some merits."

"They've got the balance sheet to do it," DeVries said in a Sept. 30 phone interview.

DeVries, in a Sept. 29 research report, said "any potential all-stock deal would be immediately accretive" to earnings per share for NextEra "even without any cost synergies."

He added that NextEra can tout its status as the "world leader in renewables" and its "slightly higher-rated" operating companies. "You're the clear, faraway leader in renewables in the country," DeVries said.

The analyst said NextEra's clean energy pipeline could help "knock down" a lot of regulatory hurdles and entice "green-focused politicians" especially given Duke Energy's continued planned reliance on natural gas and the ongoing fallout from the 2014 Dan River coal ash spill.

"All of [a] sudden, you see the puzzle pieces line up," DeVries said. "You could get this done."

NextEra also could offer numerous concessions, including keeping a headquarters in Charlotte. "You give them whatever they want," DeVries said.

Guggenheim's Pourreza, however, said NextEra's clean energy ambitions would have "zero" sway with regulators in the Carolinas, which is home to Duke Energy Carolinas LLC and Duke Energy Progress LLC

"Duke is very concentrated in North Carolina. They are a very powerful political animal in that state," Pourreza said. "It just would never pass."

In addition, Duke Energy recently laid out plans to retire all of its power plants in the Carolinas that "rely exclusively on coal" within the next 10 years and add between 1,050 MW and 7,400 MW of storage to its portfolio under six scenarios outlined by Duke Energy Carolinas and Duke Energy Progress in their 2020 integrated resource plans. The 15-year plans, which also include robust renewable capacity, are designed to allow Duke Energy to achieve its goal of a 50% reduction of carbon emissions by 2030 from 2005 levels and net-zero emissions by 2050.

Hostile takeover?

Of course, another key obstacle is whether Duke Energy is open to a merger or acquisition. Both Duke Energy and NextEra have declined to comment on "market rumors."

Guggenheim's Pourreza noted that Duke Energy Chairman, President and CEO Lynn Good "is not a willing seller."

"Pursuing a hostile takeover in the utility sector is relatively unheard of," said Lillian Federico, energy research director at Regulatory Research Associates.

No matter how the deal is structured or presented, it would require regulatory approval in at least five states, as well as from the Federal Energy Regulatory Commission and U.S. Department of Justice.

While Indiana and Florida do not have statutory authority over mergers, Federico said the deal would be subject to approval in North Carolina, South Carolina, Ohio, Kentucky and Tennessee.

"Overall, commissions have over the last few years been subjecting mergers to a higher level of scrutiny," Federico said, pointing to supplier diversity, corporate governance and broader ESG concerns. "Regulators have gotten more savvy in their approach to mergers than they were previously."

Federico added that any power market concerns would likely land at the feet of FERC rather than at the state level.

History of failed deals

Analysts and observers pointed out that NextEra has a history of failed transactions under its belt, adding another obstacle.

"We attribute the shortfalls to a combination of regulatory/political pushback and [NextEra's] discipline not to overpay or agree to overly onerous terms and conditions," Scotia Capital analyst Weisel wrote.

Earlier this year, NextEra Chairman, President and CEO James Robo made an unsuccessful pitch to buy South Carolina state-owned utility Santee Cooper, known legally as South Carolina Public Service Authority. NextEra also made a bid for Jacksonville, Fla., municipal utility JEA, which terminated its sale process. Perhaps more noteworthy is NextEra's unsuccessful attempts to acquire Hawaiian Electric Industries Inc. and Texas utility Oncor Electric Delivery Co. LLC.

NextEra also was believed to be among the potential suitors for Kansas City, Mo.-headquartered Evergy Inc. Evergy on Aug. 5 announced a stand-alone five-year strategic plan following the conclusion of an independent review of its business.

"NextEra has a troubled past with going into politically charged jurisdictions and [trying to get] a deal done," Guggenheim's Pourreza said.

Robo addressed the "elephant in the room" during a Sept. 30 presentation at the 2020 Wolfe Research Utilities & Midstream Conference, declining to confirm the Journal's report, but acknowledging "M&A is hard."

"We just need to look at our track record over the last 20 years in M&A to know it's hard," Robo said. The CEO also dismissed the prospect of a hostile takeover. "[T]he reality is that it has to be mutual, otherwise, you can never get it done," Robo said.

Still, NextEra doesn't give up easily, with some analysts seeing this as the first public gambit in a potentially long process. "I think they're going to dig in on this one," CreditSights analyst DeVries said.

Regulatory Research Associates is a group within S&P Global Market Intelligence.